SAP says division made 'inappropriate' downloads

Discloses Justice Department questioning in Oracle inquiry

LONDON (MarketWatch) -- SAP on Tuesday said a division that provides support for business software applications made "inappropriate" downloads from Oracle Corp.'s Web site and disclosed for the first time that the U.S. Justice Department is also asking questions.

SAP
SAP, -2.89%
(716460), facing a lawsuit from its closest competitor Oracle
ORCL, -3.17%
over alleged copyright infringement as well as corporate-theft charges, said U.S. officials want documents from the German firm as well as the division, TomorrowNow, which made the downloads from the Oracle Web site.

SAP said the Justice Department asked for the documents last week. It didn't disclose what documents were sought.

TomorrowNow, a maintenance provider for business software which counts Honeywell International and the city of Atlanta, Ga., as customers, frequently accesses the Oracle Web site, as well as that of rivals, for support materials, SAP said.

But the division, which says it can provide support for half the cost of what Oracle's PeopleSoft and J.D. Edwards divisions charge, "erroneously" exceeded the customer's right of access, SAP said.

SAP, which heading into Tuesday was saying it would mount a "vigorous" defense to counter Oracle's charges, insisted the documents that the division downloaded weren't passed on to the parent company.

"When we acquired TomorrowNow it was very important that it (kept) a clear firewall," said Henning Kagermann, SAP's chief executive, on a conference call. "I think that it's very important that these firewalls were kept intact."

Oracle, in a brief statement of its own, said SAP's comments were an admission to "repeated and illegal downloading of Oracle's intellectual property."

Oracle also said that it wants to determine the magnitude of the illegal downloads and that it will cooperate with the Justice Department's investigation into SAP.

Shares of SAP slipped 1.4% in Frankfurt trading, making it one of Tuesday's worst performers among German large-cap issues. See Europe markets.

Oracle shares were flat in early U.S. trading.

James Clark, an analyst at Credit Suisse, forecast that SAP will pay close to $100 million to settle the case.

"We believe that while SAP's response over allegations of corporate theft appears satisfactory, TomorrowNow's transgressions could attract damages of some order," he said.

The division doesn't on its own bring in money for SAP -- TomorrowNow's operations in the U.S., the U.K., Holland, Australia and Singapore all were loss-making in 2006, according to SAP's annual report, with the U.S. division tallying 6.1 million euros ($8.2 million) in red ink.

But the division makes up part of the company's "Safe Passage" program meant to lure ex-Oracle users into taking on SAP software.

New oversight

SAP added that it's appointing SAP America Chief Operating Officer Mark White as executive chairman of TomorrowNow to manage its operations, including compliance programs. It will also provide renewed training for employees on company policies.

Kagermann said he was upset that Oracle brought the complaints through the courts instead of directly to the company.

"We weren't contacted before or after the suit," he said on a conference call.

But Kagermann also expressed confidence that the suit wouldn't impair business: "I don't see any damage for our U.S. business."

SAP, in addition to a statement and a press conference, also provided the company's formal response to the lawsuit.

"Defendants admit that certain portions of TN's PeopleSoft Daylight Savings Time solution are substantially similar and in some instances identical to Oracle's DST Solution, but otherwise deny the allegations," SAP said in the court filing.

Blow to third-party market?

TomorrowNow and rivals such as Rimini Street provide support for business software at about half the cost of the company that makes the software, said Ray Wang, principal analyst for Forrester Research.

Maintenance costs typically represent about 20% to 25% of the total cost over a software product's lifecycle.

"The underlying issue our clients would like to know is if Oracle or SAP is committed to the third-party maintenance market," Wang said.

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